–Adds Detail To Version Transmitted At 1141 GMT
–BOE King: Goes Against Mandate Not To Set Policy In Line With F’cast
–BOE King: More QE If Net Trade Can’t Offset Falling Domestic Demand
–BOE Posen Says QE2 Will Not Be As Potent As 1st Time Round

LONDON (MNI) – Bank of England Governor Mervyn King said Thursday
that the Monetary Policy Committee would be ready to sanction further
asset purchases if net trade fails to pick up enough to offset the
slowing in the domestic economy.

Speaking at the Treasury Select committee, King was asked how the
MPC would respond if net trade failed to rise quickly enough as domestic
demand eased. He replied that the automatic stabilisers coming into play
would help offset that and further quantitative easing was also a
possibility.

“There are two obvious consequences of that. One is the
automatic stabilisers which would lead to the change in the level of the
fiscal deficit, so they kick in, and they are quite powerful in the
United Kingdom, with high marginal tax rates,” King said.

“The second is monetary policy where we could engage in further
asset purchases, were we to think that necessary to keep inflation on
track to meet the target.”

GOVERNOR DEFENDS LACK OF MPC POLICY MOVES

While the BOE Governor raised the possibility of further
quantitative easing, he was also grilled about why he believes it is OK
to take no action at present with inflation running more than a full
percentage point above target.

The BOE MPC’s central forecast is that inflation will fall back
below target in the medium term. King said it would be breaching its
remit if it set policy in a way not consistent with its view of the
inflation outlook.

“I think it would be going against the (MPC’s) remit to take
actions which were not consistent with meeting the inflation target in
the medium term if that is our view,” King said.

“What we are paid to do is to take that difficult judgement on
where we think the outlook is likely to be in the medium term to balance
both the upside and downside risks and to tell it how it is,” he said.

King said each month the MPC has to make a judgement on policy and
“if we think the right level of interest rates, or the right level of
asset purchases today, is the one to keep inflation on track to meet the
target that is what we do.”

“We are prepared to change it in any month in either direction if
our judgement does (change) in response to news,” the BOE Governor said.

King insisted to the TSC that the MPC must and would
continue to be guided by its 2% inflation target despite the persistence
of inflation above the target in recent times:

“It’s very important that we stick to our 2% inflation target and
that we explain why it is that inflation has been above the target. I
think it would have been wrong to have raised interest rates markedly
over the past year, deliberately in order to have created a deeper
recession, in order to bring down inflation that was the result
primarily of temporary shocks”.

But King added – “At some point policy will need to be normalised,
there’s no question of that”.

MPC Member Adam Posen was pressed as to why he did not share the
view of Member Andrew Sentance that a small and gradual tightening of
policy now would be a better policy move than waiting and risking a
sharper rise in rates at some future point which might derail the
recovery.

Posen replied: “I think it would be, frankly speaking, to be much
more of a shock to the economy to move policy in the wrong direction,
than to worry about the policy path over a long period of time, I think
markets would look at us very strangely as to what it is we think
is going on were we to do that (raise Bank Rate)”.

“Markets in general and citizens in advanced economies don’t
require central banks to move slowly, they require central banks to move
correctly”.

NEED TO BOOST NET EXPORTS

King stressed the need to boost exports over the next few years:

“Over the next few years we do need in this country to expand our
net exports, not just exports but production to substitute for imports,
in order that we can accommodate the slowing in domestic demand.”

“It is a very important challenge,” he added.

But King denied that the MPC would endorse more QE simply to
bolster UK trade by driving down sterling, saying the focus was on
meeting the inflation target.

The TSC evidence session raised questions over how effective QE
had been and how effective any QE2 might be. Posen said its impact has
diminished over time.

“I don’t think the impact of QE is as strong now for two quick
reasons. First, part of the benefit of QE, that we embarked rightly on
in 2009 … is to deal with panic in markets … thankful we don’t have
that but we don’t have the benefit of that now”.

Posen said that the second reason QE’s impact had lessened is
because the financial panic had eased – “then the amount of desire that
people have for Gilts versus other securities goes down, or rather they
are more willing to substitute other things for Gilts.”

“The power of QE lies in the assumption that there is an imperfect
substitutability between Gilts and other assets, and in more normal
times there is more substitutability so “the mechanism is less potent.”

King chose instead to stress that QE is a standard tool of
monetary policy with a long history, arguing it was no less orthodox
than changing Bank Rate.

The governor said he would have as much confidence in QE as in
interest rate changes.

The most hawkish member on the MPC, Andrew Sentance, argued against
the view that hiking rates would necessarily damage consumer and
business confidence.

“Low interest rates are obviously helping people who have got
mortgages and helps maintain their confidence. But a lot of people are
seeing their savings income drop so their confidence has been reduced by
a reduction in interest rates.

“So the notion that a rise in interest rates will in itself hit
consumer confidence is (wrong) it’s a more complicated matter,” Sentance
said.

–London Bureau; tel: +442078627492;email: ukeditorial@marketnews.com

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